India bonds sink deeper on RBI commentary, inflation concerns

Indian government bonds slid further on Wednesday, with the 10-year yield climbing to a peak not seen since March 2023, Business Recorder reported. Sentiment weakened after RBI Governor Sanjay Malhotra told a media outlet on Tuesday that monetary policy and financial stability cannot be fully split apart, even though the bank typically avoids using rates for the latter goal.

The selloff followed a run of RBI steps to shore up the rupee, among them a special facility for oil firms' dollar purchases and cash margin requirements on FX hedges. Traders said these steps passed the job of defending the currency onto the yield curve by widening the gap with US yields. The benchmark 6.94% 2036 bond yield rose 3.5 basis points to 7.3999%, while overnight swap rates also jumped on bets for a December rate hike.

Inflation added to the pressure, with wholesale inflation accelerating to 11.39% in September, faster than expected, while retail inflation reached 5.54%. Retail inflation was also expected to exceed the central bank's 6% upper limit in October, and Payal V. Pandya of Bajaj Broking said that would make a rate increase at the December 2026 policy meeting inevitable. Oil was 0.8% higher at $106 a barrel on the day, while US inflation figures due later that day were awaited for fresh direction on Federal Reserve policy.